Solar Rooftop Lease Securitization A Ground-Breaking Success

Sean Kidney

Last week we
blogged that SolarCity (SCTY)
and Credit Suisse were about to issue a new $54.4 million, climate
bond – a rooftop solar lease securitization. It’s
out: BBB+, 4.8%, 13 years. The long tenor is interesting –
and great. And S&P’s BBB+ rating suggest those credit analysts
may be beginning to understand solar.

This bond has been long-awaited by the green finance sector, who
are hoping it’s the harbinger of things to come.

I did get the chance to look at the S&P opinion. Their rating
reflected, as they put it, their views on over-collateralization
(62% leverage; that’s how companies do credit enhancement), SolarCity's track record
and the credit quality of the household borrowers.

They also noted that “because this asset class has a limited
operating history, we expect the rating to be constrained to low
investment-grade for the near future”. Presumably that means we
can expect better ratings five years away.

The asset-backed securities will be paid for with the cash flow
from the SolarCity‘s
rooftop solar leases. This allows SolarCity to raise fresh
cash to do the next wave of deals; we think of this as supporting
velocity in working capital.

I’m mentioning this because folks from the policy and carbon
world sometimes feel a bit queasy about climate bonds backed by
existing assets. “Shouldn’t we be focusing on new project
finance”, they ask. No.

In the project space, as Citi’s Mike Eckhart is fond of reminding
us, bonds only make up 5% of debt financing globally. Banks
provide the rest – and that’s unlikely to change much.

The critical task for climate bonds is to re-finance – to
provide an exit strategy for those folks who best understand
project development risk: equity investors, energy corporates, and
bank lenders. Once that project development risk has gone, climate
bonds become the means to re-finance among the pension and
insurance fund sector, whose risk appetite is much lower.

This is important for energy companies, allowing them to
effectively offload “mature” assets (solar panels in place, leases
signed, revenue flowing) and so quickly recycling capital into new
projects.

It’s also vital for banks, struggling with recapitalisation
pressures post-crash. If they can securitize their loan portfolios
it will allow them to do more with their now reduced allocations
to project lending.

It opens up a critical new financing option for companies,
helping them grow faster. And boy do we need them to grow: if
we’re to have a chance of avoiding climate
change tipping points we need everylow-carbon
industry to grow at maximum rates.

SolarCity installs
rooftop solar panels, typically at little or no cost to customers.
The company owns the systems and its residential and commercial
clients sign long-term agreements to buy the power.

Interestingly SolarCity‘s
share price jumped 4.3% when the bond came out, making the largest
US solar company by market cap. Confidence building? [Ed. Note: It
should not be surprising that when a company gets access to a
cheap new form of finance, it helps the stock.]